Foreign Direct Investment and Housing Prices Nexus in Construction Industry of Malaysia

Abstract

The housing market in Malaysia has experienced significant upheaval over the past twenty years, driven by consistent inflows of foreign direct investment (FDI) into the building sector. Although these investments have catalyzed urban modernization and economic expansion, they have also been linked to escalating housing prices and diminishing affordability, especially in metropolitan areas. This study examines the association between foreign direct investment in construction and housing prices in Malaysia, determining whether foreign investment serves as a catalyst for housing price inflation or promotes sustainable urban growth. The study utilizes quarterly data from the first quarter of 2009 to the fourth quarter of 2023, employing a Vector Error Correction Model (VECM) to analyze both short-term and long-term dynamics among the housing Price, Foreign Direct Investment in construction sector, real interest rate, and income. Unit root tests indicate that all variables are integrated of order one, I(1), whereas Johansen cointegration results demonstrate a stable long-run equilibrium relationship among them. The results indicate that foreign direct investment in construction has a positive and considerable impact on home prices, whereas real interest rate indicates a negative effect on price fluctuations. Income growth demonstrates a beneficial although insignificant impact. Granger causality studies demonstrate a unidirectional causal relationship from foreign direct investment (FDI) to housing prices, confirming that property market of Malaysia is primarily driven by investment rather than income. The study suggests that whereas foreign direct investment (FDI) fosters construction expansion, it simultaneously impairs affordability constraints. Policymakers ought to implement focused FDI screening, bolster macroprudential instruments, and improve domestic construction efficiency to guarantee equitable and sustainable housing development.